As unicorns like Flipkart, Quikr and Zomato turn 10, what next for the startup-verse?

While Flipkart reportedly posted revenues of Rs 17,930 crore against a loss of Rs 5,769 crore for the year ended March 2016, the corresponding numbers for the biggest player in the used-car segment are Rs 82.5 crore and Rs 144 crore.Suman Layak, Rajiv Singh&Rahul Sachitanand | ET Bureau | February 26, 2017, 12:02 IST

It was founded in 2007 as a greenfield incubator trying out several ideas and products. Almost a decade later, last October, Ibibo Group merged with India’s largest online travel aggregator MakeMyTrip. The combined valuation was pegged at $1.8 billion, and Ibibo’s owners — Naspers and Tencent — got a 40% stake in the merged entity, along with brands such as Goibibo, redBus, Ryde and Rightstay. Industry observers hailed it as a successful exit.

Except that Ibibo founder Ashish Kashyap sees it as a successful “merger” and not an “exit”. His reasoning: the deal created value for all the constituents — shareholders, employees, cofounders and partners. “Initially people laughed at me when I launched Goibibo in October 2009 as an online travel aggregator (OTA) in a market that was already crowded,” recalls Kashyap, adding that the OTA space was limited to flight bookings. There was a conspicuous absence of the online hotels category. Goibibo filled the gap, he says.

Kashyap predicts that consolidation will shape the startup ecosystem: “Death of numerous players would lead to the birth of the next wave of startups in the Indian internet jungle.”

Year 2007 will go down in the early pages of the Indian startup saga as one in which some of the most high-profile — but not necessarily successful — internet startups took shape. Sure, they weren’t the first. There were Naukri and MakeMyTrip before them. But it was around that time — between 2006 and 2008 — that startups like Flipkart, InMobi, Zomato and Quikr which would go on to become unicorns, with valuations of over $1 billion, took shape. Over the decade, they redefined the contours of not just entrepreneurship but also urban life in India. If Flipkart was the flag bearer for this generation, with two founders selling books from their bedrooms scaling it to India’s top ecommerce company, others who started a decade ago built the market along with their businesses from scratch. And between 2007 and 2017, the mood of the gladiators in the consumer internet and ecommerce space has moved from adventurism to euphoria and to wariness.

Time to Reboot Now is the time to batten down the hatches. Many of these ventures are victims of unrealistic valuations, easy money and stratospheric salaries that incited a startup stampede in India. As the financial woes of Snapdeal hit the headlines earlier this week, and news of a couple of other one-time high-profile ventures shutting down filtered in, it is clear that the decade ahead will be one of a reboot, new learnings and of new poster boys and girls.

Nitin Seth, chief operating officer, Flipkart, spoke to ET Magazine on completing a decade and looking ahead: “In the first 10 years we were at the stage where growth was all-important. Now there is focus on supply chain and profitability.”

“In the last 10 years we witnessed the creation of the entrepreneur ecosystem but not much wealth or sustainable revenue,” says Ashish Gupta, cofounder of venture capital firm Helion Venture Partners. “In 2014-15 we saw premature excitement about a quickly growing and very large revenue pool. That view has corrected as most people realise that the anticipated revenue pool is smaller than previously thought and does not match the capital deployed.”

“Most startups estimated the size and scale of the Indian market wrongly. We crossed a major threshold in terms of internet access and mobile penetration but still lag behind heavily in terms of purchasing power capacity. The startups scaled ahead of time,” adds Rutvik Doshi, director at the India arm of Inventus Capital Partners, which is based out of Bengaluru and Silicon Valley.

Adhil Shetty, co-founder of online financial services portal BankBazaar, started out in 2008, along with brother Arjun and sister-in-law Rati Shetty. Almost a decade later, the family-led startup clocked Rs 70 crore in revenues (not GMV) in 2015-16. Shetty does not harp on growth — he says his secret sauce is sticking to the knitting and focusing on online alone, resisting the temptation to go offline.

The mood is captured by startups come lately like the three-year-old Curofy, a doctors’ networking venture. Co-founder Nipun Goyal, an IIT-Delhi graduate who traded his investment banker robes at Rothschild & Co for the overalls of a startup, speaks circumspectly about eschewing vanity metrics and focusing early on profits.

The good news is that much of the hard work on the basics may have been done. Says Sandeep Singhal, cofounder of Nexus Venture Partners: “A lot of capital initially went into building the market. Everyone had to build their own supply chain, train personnel and even educate consumers and vendors on how to buy and sell products online.”

Meru Cabs is another venture that was born in 2007, before the smartphone era, and before Uber and Ola hit the road. The radio taxi service can take credit for perhaps seeding the ground for ride-sharing apps. Says CEO Nilesh Sangoi: “Today, we have managed to make mobile apps our largest demand channel.” Scale built over the past decade may also offer clues to standalone sustainability. GirnarSoft, which runs auto portals such as CarDekho.com, Gaadi.com and ZigWheels. com, was founded the same year as Flipkart: 2007. Ten years down the line, both companies are in the red, albeit on different scales.

While Flipkart reportedly posted revenues of Rs 17,930 crore against a loss of Rs 5,769 crore for the year ended March 2016, the corresponding numbers for the biggest player in the used-car segment are Rs 82.5 crore and Rs 144 crore. However, Anurag Jain, cofounder of GirnarSoft, reckons, “We are at the cusp of being operationally profitable, excluding marketing costs.”

No Way OutWhat worries some is that there are not enough exits happening. Yatra. com’s listing on the Nasdaq through a reverse merger in December last year is probably the high point of the last decade. Buyouts have been few and far between — such as Flipkart buying Myntra and then Jabong, besides the MakeMyTrip-Ibibo Group merger.

And a few deals may come unstuck. Snapdeal is reportedly preparing to sell FreeCharge for $100 million less than the $400 million it forked out in 2015 for the payments app.

Sameer Jindal, managing director of global investment bank GCA, has spent a lifetime in the technology M&A arena and was based in San Francisco before moving to Mumbai in October 2013. Jindal says it is a norm for VCs in Silicon Valley to look for an exit within five to six years, which he agrees is a crazy time frame. Jindal would like to see Indian companies and entrepreneurs turning up a little more at roadshows and events in India and abroad, showing their faces and getting known to people who might finally buy them out. “A tech company must get bought. It should not have to be sold,” says Jindal.

Arihant Patni, a scion of the Patni family and managing director of Patni Financial Services, which runs two venture funds, says: “Our VC space is over 10 years old, starting off in 2004-05. We have just finished one cycle.”

For the unicorns — or at least those that still have their heads above the $1 billion value watermark — buying at attractive valuations in sombre times isn’t a bad idea. Quikr founder Pranay Chulet, for instance, is using the opportunity to grab some good deals. Since November 2015, the classified ads platform has picked up smaller rivals in verticals such as automobiles, jobs, real estate and beauty services with undisclosed price tags. “This is an excellent market to make good deals,” says Chulet. “However, we are not indiscriminately buying companies. It will take us six quarters to be profitable, with the first vertical expected to break even in three to seven months.”

Journey Down the PyramidIf acquisitions is one way to grow (profitably), another is to seek out new customers in new markets. Explains Flipkart’s Seth: “In the last 10 years we were focused on the top of the pyramid. In the last 10 years even the nature of the Indian consumer has changed.” The growth, he says, does not lie in SEC A, but in SEC B, C and D. (The socioeconomic classification or SEC groups urban Indian households on the basis of education and occupation of the main wage earner.) “Those consumers are very different, have different needs.

India-specific solutions will be needed to address them. Catering to tier-2 and tier-3, the middle of the pyramid, with different income levels, will need a lot of innovation.” As the startup ecosystem clears out (of not just ventures, but some funds too), entrepreneurs and risk capital providers are resetting their goals. “This is the best time for an entrepreneur to build a strong business, without the distraction of crazy salaries and chasing unrealistic valuations,” says serial entrepreneur K Ganesh. “From the investor point of view too, this is a good time, with accidental entrepreneurs staying away from a tougher market.”

Entrepreneurs may have to crack these business models using their funds more judiciously. “I think there is a lot of opportunity to build good companies, with more careful attention to how money is spent,” says Gupta of Helion. “They need to avoid getting (cash) burn too far ahead of market opportunity.”

Akhilesh Tuteja, a partner at KPMG, feels me-too ideas will not survive in India any more. “There can be one national winner and may be one regional winner with a product. There is no second Twitter or Facebook. So if it is etailing, surely in the long run, there cannot be five of them.”

Tuteja feels that there may be space for regional specialists in a large market like India, but what will really survive will be unique and well timed ideas. “The biggest factor is timing. You have to bring your idea to play right on time — like how BookMyShow went online at a particular time (2007).”

Experimenting in the garage-phase days may be fine, but entrepreneurs have to quickly zero in on a business model. Shashank ND, who founded Practo, a healthcare discovery and booking platform in 2008, points out that startups during their bootstrap period should identify one problem area and try and find a solution for it from end to end. “This helps build not just a product but find a solution to that problem.”

The ventures of the 2007-17 decade may have also done their bit in spurring the entrepreneurial itch — and holding out some (hard) lessons for a fresh bunch of startup guys. “Over 40 startups have been founded by ex-InMobians,” declares Arun Pattabhiraman, global head of marketing at InMobi, a mobile advertising platform and one of India’s unicorns. He also talks about the “boomerangs”: people who left the company to start new ventures and came back when they failed. Over the past year, 18 have returned to the fold.

In 2017, the prodigals may still be able to find their way back home. It may not be as easy in the years ahead.

Snapping out of itOn February 11, Snapdeal cofounder Kunal Bahl retweeted a picture: a 20-sided Egyptian die belonging to 200 BC. Museum Archive, which uploaded the original picture, describes its Twitter handle as “a collection of artifacts of cultural and historical relevance made available for public viewing”. The description ends with four more words: Find your place in history.

Snap to February 23. Snapdeal created history of a slightly different and unprecedented kind in the nascent Indian startup world. Cofounders Bahl and Rohit Bansal will relinquish their salaries, and the online marketplace will fire some 600 employees.

A much-fancied unicorn, which till a few months back was championing the cause of “cashless India” through FreeCharge, is ostensibly running out of cash, has reportedly put the mobile wallet on the block and is resorting to some belt-tightening. While Snapdeal declined to comment on its headcount and the fate of FreeCharge, a spokesperson said that the company is not planning to raise new rounds of funding.

“It is well capitalised on growth to profitability,” the spokesperson claimed in an emailed response to ET Magazine. Early this week, in a media release, the etailer described its layoffs as “rationalising part of its workforce on its journey to become India’s first profitable ecommerce company in two years”.

In a letter to its employees, Snapdeal cofounders admitted that the company made errors in execution. Over the last two-three years, Bahl and Bansal wrote in the letter, with all the capital coming into this market, “our entire industry, including ourselves, started making mistakes. We started growing our business much before the right economic model and market fit was figured out”.

Venture capitalists reckon that Snapdeal is suffering from the same malaise that affected most of the startups: irrational scaling. “Mass layoffs, no big round of funding and heavy losses are the side effects of scaling too fast too soon,” says Rutvik Doshi, director at the India arm of Inventus Capital Partners. In order to gain market share, several startups acquired users rapidly by doling out discounts and subsidies. However, it did not lead to longterm loyalty because the consumers were not yet ready.

Everyone, including startups and investors, thought that a multibillion market is available for grabs and forgot about the fundamental economics of a business. The valuations, Doshi says, were forward-looking, but unfortunately growth slowed down and unit economics did not improve, which led to falling valuations and money drying up.

Snapdeal’s next milestone is to turn profitable in two years. A lot more could happen till then.